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Lack of demand for new loans fuels credit contraction

Demand for new loans has virtually ground to a standstill owing to the continued stagnation of the Greek economy which has resulted from the uncertainty generated by the endless negotiations with the country’s creditors and delays in the implementation of reforms.

In February the annual rate of total financing of the private sector came to a negative 1.6 percent, with loan repayments outweighing new loan issues by 101 million euros. In January the credit contraction had amounted to 885 million euros. This negative picture is known to have continued in March, while banks are expecting a more positive performance in the latter half of the year, provided of course that the government completes the second bailout review in May.

Bank officials say that besides the major liquidity problems forcing banks to be extremely cautious with the issue of new loans, there is also a major decline in demand. Hellenic Bank Association figures show that the drop in demand by households has reached up to 90 percent compared to the period before the outbreak of the financial crisis.

It is quite telling that last year banks received an average of 82 mortgage applications per working day against 1,182 applications before the crisis, in 2007. This constitutes a reduction of 93 percent. Similarly, the average daily volume of applications for consumer loans reached 4,455 in 2016 against 32,273 in 2007, amounting to an 86 percent reduction.

Banks report that most households which still have high incomes do not wish to borrow due to the uncertainty and overtaxation, while demand mostly derives from households with financial problems that are not deemed solvent.

The situation is even more problematic when it comes to corporate loans, as demand from healthy enterprises is close to zero. This picture is clearly reflected in ICAP data, according to which the rate of corporations on high credit risk and with sustainability problems has risen more than tenfold in eight years, from 6 percent in 2009 to 63 percent today.